Will AI Drive Applied Materials Q4 Results?

Applied Materials (NASDAQ:AMAT) stock has had a solid year thus far, rising by about 14% year-to-date. In comparison, Applied’s semiconductor industry peer Texas Instruments stock (NASDAQ:TXN) has gained about 21% over the same period. Applied is set to report its Q4 FY’24 results around mid-November 15 and we expect earnings to come in at about $2.20 per share up from $2.12 in the year-ago period, while revenues are likely to stand at about $7 billion, up about 3% compared to last year. See our analysis of Applied Materials Earnings Preview for a closer look at what could drive the company’s quarterly earnings.

Applied Materials faced challenges last year due to reduced capital spending post-Covid-19, but conditions have improved a bit in the current fiscal year. In Q3 FY’24, the company reported a 5% year-over-year revenue increase to $6.8 billion with earnings coming in at $2.12 per share, surpassing expectations. The semiconductor downcycle appears to have bottomed out, with logic chip demand recovering alongside the PC market and growing GPU demand from data centers. Meanwhile, the memory market is shifting toward advanced high-bandwidth memory, driven by the AI sector’s robust demand. AI workloads require significant computational power, higher memory capacity, and complex chips that rely on advanced manufacturing processes. Applied Materials is well-positioned in these areas, offering tools and services in materials engineering, process control, and integration.

Applied stands to benefit from potentially higher orders and a rising mix of higher-end equipment driven by applications such as AI and the shift to more advanced process technologies. This is also driving the company’s margins higher. Gross margins were up 100 basis points year-over-year to 47.3% in Q3 and we could see similar trends in Q4 as well.  Now Nvidia has been the hottest of the AI stocks. But did you know there is a lesser-known AI name that could offer more upside than Nvidia?

The increase in AMAT stock over the last 4-year period has been far from consistent, with annual returns being considerably more volatile than the S&P 500. Returns for the stock were 84% in 2021, -38% in 2022, and 68% in 2023. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, is considerably less volatile. And it has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics.

Given the current uncertain macroeconomic environment around rate cuts and multiple wars, could AMAT face a similar situation as it did in 2022 and underperform the S&P over the next 12 months – or will it see a strong jump?

Besides the higher demand for AI-related chips, Applied also stands to benefit from the recent shift in U.S. monetary policy, following the Fed’s recent rate cut.  As a major supplier of highly specialized semiconductor fabrication equipment, Applied Materials is dependent on the capital spending cycle of major chipmakers such as TSMC and Samsung. Now lower interest rates effectively reduce borrowing costs for manufacturers and make larger projects more viable. This could drive up demand for the high-end equipment that Applied supplies. Applied Materials stock currently trades at about $180 per share.  We value Applied Materials stock at $222 per share, about 20% ahead of the current market price. See our analysis of Applied Materials Valuation for a closer look at what is driving our price estimate for the stock.  See our upside scenario of How Applied Materials Stock Can Surge To $350

While investors have their fingers crossed for a soft landing by the U.S. economy following the start of the Fed’s monetary easing cycle, how bad can things get if there is another recession? Our dashboard How Low Can Stocks Go During A Market Crash captures how key stocks fared during and after the last six market crashes.

[1] Returns as of 10/18/2024
[2] Cumulative total returns since the end of 2016

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